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Monetary Policy and Housing Loan Default

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  • George Overton
  • Barbara Castillo Rico

Abstract

The most direct channel of transmission of monetary policy to households is the modification of ECB lending and deposit facilities rates. Outstanding borrowers with adjustable rate loans face affordability conditions changes with important consequences on their financial situation. In this paper, we study the impact of monetary policy changes on housing credit default over the period 2004-2015. We use an extensive panel of French housing loans to reconstruct amortization tables over the life of each loan and compute changes in quarterly payments due to monetary policy action, later using hazard models to map changes in interest rates to default. Importantly, our data set allows the assumption of the absence of strategic default our analysis, which isolates involuntary default in our estimates. First, we find that a 100 bp increase in quarterly payment induced by variations in the 3-month Euribor increases the probability of default by around 5\%. Second, we identify employment stability as a major insurance factor against rising policy rates during contractionary monetary policy action. Finally, we provide evidence about the existence of a self-selection of riskier borrower profiles into adjustable rate loans. The concern regarding payment size on adjustable-rate loans is of heightened importance in a monetary policy context characterized by uncertainty over the timing of a rate increase following a sustained period of low or negative rates.

Suggested Citation

  • George Overton & Barbara Castillo Rico, 2020. "Monetary Policy and Housing Loan Default," EconomiX Working Papers 2020-23, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2020-23
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    File URL: https://economix.fr/pdf/dt/2020/WP_EcoX_2020-23.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Housing loans; Monetary policy; Default;
    All these keywords.

    JEL classification:

    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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